04-10-2021 10:19 AM | Source: ICICI Securities Ltd
Banking and NBFC Sector Update - `Interest on interest` waiver By ICICI Securities
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‘Interest on interest’ waiver – RBI notifies its applicability to all loans, impact of 9-11bps on advances

The Supreme Court’s (SC) judgment in ‘interest on interest’ waiver case has extended the relief of waiver to loans even above Rs20mn. Taking into effect, RBI has issued a notification stating 1) reliefs shall be applicable to ALL borrowers (including working capital facilities), irrespective of whether moratorium had been availed or not; 2) all lending institutions shall immediately put in place a Boardapproved policy to refund/adjust interest on interest charged during the moratorium period; 3) methodology for the calculation of amount to be refunded/adjusted for different facilities shall be finalised by the Indian Banks Association (IBA); and 4) aggregate amount to be refunded/adjusted for the above relief will have to be disclosed in FY21 financial statements.

Earlier our reading was verdict will be applicable only to loans under moratorium as Supreme Court order stated that any amount “already recovered” shall be refunded to “concerned borrowers”, or be credited/adjusted in the next instalment. However, as per RBI’s notification, it is applicable on all loans. We still await clarity on whether the cost will be borne solely by financiers or shared by the government or would IBA specify anything about applicability.

 

Our view on impact:

* We have tried to quantify the impact of waiver of ‘interest on interest’ at an industry level using a few key publicly disclosed variables, viz. lending yield and proportion of >Rs2mn loans – for the purpose of our analysis.

* In our opinion, waiving ‘interest on interest’ on loans above Rs20mn during the moratorium period on all loans will lead to a fresh burden of Rs112bn on the industry.

* This will include ~Rs32bn for private banks/SFBs, ~Rs55bn for PSU banks and Rs20bn for NBFCs/HFCs.

* The above means a drag of ~10bps on advances. With respect to lender-groups, this translates to RoAs (advances) of 9-11 bps for private banks, SFBs, PSUs and NBFCs/HFCs, respectively. Given it will come in one single quarter the impact on annualised basis will be higher.

* Although difficult to gauge bank-specific impact, we have estimated based on the corporate versus retail mix to gauge some insights. Financiers with higher exposure towards loans of >Rs20mn will have relatively higher impact namely PSU banks, corporate NBFCs, construction developer financiers etc. (refer chart 2 and 3)

* Many leveraged corporates having banks/NBFCs borrowings will see one-time ‘interest on interest’ credit in the near term. Banks are required to disclose the aggregate amount to be refunded or adjusted in FY21 financial statements. We will have to see how corporates book this ‘interest on interest’ benefit – on accrual basis in Q4FY21 or on receipt basis in Q1FY22.

* Interestingly, NBFCs/HFCs borrowing from banks will also be technically qualified for this benefit – retail NBFCs with higher dependence on bank borrowings to benefit more.

 

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